After spiralling downward for two months, the Brazilian economy has begun to regain its footing. This is good news for the US, which has a great deal at stake in Brazil's success. But no one can yet be complacent about the prospects of full recovery. Brazil's economic future depends mainly on its own efforts, but it continues to need external support - political as well as economic.
Washington can and should provide some of that support. US trade with Brazil is about the same as with France, and more than $40 billion of US capital is invested there. US strategy in Latin America can't succeed without the cooperation of an economically healthy Brazil. What happens in Brazil affects every country in South America. Hemispheric free trade depends on the US finding common ground with Brazil. The active support of Brazil is also vital to the effectiveness of inter-American institutions in promoting democracy, fostering respect for human rights, addressing social ills, and resolving border conflicts. Cooperation with Brazil is also important to the US in global issues like environmental degradation, drug trafficking, and proliferation of nuclear and conventional weapons.
Working in tandem with the International Monetary Fund (IMF), the US Treasury has played a key role in Brazil's turnaround. This is one country in which the IMF prescription is working. In October, the IMF and Brazil reached agreement on a program, including $42 million in new loans, which restored a measure of international confidence in Brazil. But, when the Brazilian congress rejected a crucial part of the IMF package and several opposition governors threatened to suspend debt payments to the central government, investors began again to bet against Brazil. After a modest devaluation failed to stop the hemorrhaging of foreign reserves, the government was forced to let the currency, the real, float freely to avoid the risk of depleting its reserves. The real went into free-fall, at one point hitting 50 percent of its pre-crisis value.
No one was sure the downward plunge of the economy could be stopped in short order. But Brazil's congress finally got around to approving the new taxes and expenditure cuts that it had long resisted, the rebellious governors were largely brought under control, and a new president recruited from Wall Street was put in charge of the Central Bank. With all this accomplished, Brazil was able, by the end of February, to reach agreement with the IMF (and the US Treasury) on a new fiscal program, and $9 billion in capital was immediately made available to shore up Brazil's reserves. It also shored up international confidence in Brazil, which has, for the moment, stabilized the real and convinced private lenders to keep credit lines open.
But the recuperation is still incipient, and prospects could again turn sour. The future depends mainly on the actions of Brazil, but there are ways US policy can help. The most important US initiatives aren't particularly dramatic or expensive. Indeed, they're modest and virtually cost-free.
First, the US must keep its markets open to Brazil. The recent US imposition of huge tariffs on Brazilian steel - along with steel from Japan and Russia - was an ungenerous response to three economies in deep recession. US protectionism will add to the global economic slump, increasing prospects the slump will spread to the US.
Second, it's time for the US to get an ambassador to Brazil. The country has been without one for nine months - while Argentina hasn't had a US ambassador for three years. This is a maladroit way to do business with South America's two largest nations. The White House has already nominated Brian Atwood, the exceptionally capable head of the US Agency for International Development, as ambassador to Brazil, but the Senate hasn't acted on it.
Third, the US ought to explore with major Latin American nations alternatives for greater hemispheric financial coordination to help protect the region's economies against currency crises, and to more effectively deal with them when they do occur.
Finally, if Brazil is able to keep its side of the bargain by imposing needed fiscal discipline and deepening its economic reforms, the US should stand ready to assist with additional capital should it be needed. No other investment will more effectively enhance the future of US-Latin American relations.
*Peter Hakim is president of the Inter-American Dialogue in Washington.